Economy: Food Security Bill: Additional pressures on the government ::Kotak Securities

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Economy
Food Security Bill
Food Security Bill: Additional pressures on the government. In light of the
cabinet’s approval to the draft Food Security Bill, we estimate that the food subsidy bill
in FY2013E will be around Rs250 bn more than the budget estimates of Rs606 bn in
FY2012E. We had already factored in Rs850 bn as food subsidy for FY2013E fiscal
estimates. The additional subsidy will put added pressure on the fiscal that we now
estimate could go up to 5.8% of GDP.
We expect food subsidy in FY2013E at around Rs850-900 bn
The additional burden to the government in FY2013E compared to the current targeted public
distribution system is likely to be around Rs250 bn (see Exhibit 1). In this, we do consider the
additional costs incurred due to transportation, storage, etc. The Economic Survey of FY2011
notes that the procurement incidentals and distribution costs for rice and wheat for FY2011BE are
at Rs5.7/kg and Rs4.7/kg, respectively. The total subsidy bill for rice and wheat is computed at
Rs771 bn under the Food Security Bill. While our estimate of additional burden is calculated only
for rice and wheat, the subsidy burden will be higher if we include other items such as coarse
cereals and sugar that are also currently distributed through the PDS. Under the Bill, there is also a
provision of meals to special groups such as destitute, homeless, persons living in starvation and
disaster-affected persons. Further, this Bill incorporates provision for nutritional support for women
and children, to be shared between the centre and the state.
Procurement and storage facilities need to be increased for enactment
In a GameChanger comment dated July 14 (‘Food Security Bill: There is no free lunch‘) we had
highlighted that the government needs to procure around 62 mn tons of grains compared to ~40
mn tons that it currently does (see Exhibit 2). This takes into account other government schemes
like mid-day meals etc. and some minor buffers for consecutive drought years. We also do not
account for any leakages across the supply chain. With such a huge amount to be procured, the
government is also likely to face challenges with storage. According to estimates of the expert
committee report on the Food Security Bill, an additional storage for about 21 mn tons is required
(see Exhibit 2). This is likely to be one of the positives as it would help infrastructure expansion in
the agriculture logistics sector for storage and transportation requirements.
Crowding out of private players may increase prices in the general markets
With the government demanding a larger share of the agricultural produce (without any
comparable improvement in productivity); the markets may be distorted by two forces. (1) With
lower share of produce for private players, prices may eventually be higher for the consumers
outside the aegis of Food Security Bill and (2) to provide incentive for more production of
foodgrains, the government would have to raise MSPs further, thereby raising the floor for agrocommodity
prices. Further, there might be higher import requirements to meet the Food Security
Bill needs that could have currency implications. Overall, in the near to medium term, food
inflation risks are more skewed to the higher side.
Fiscal implications will be most definitely on the negative
While the intent and scope of the Food Security Bill is positive, we remain concerned on the
centre’s fiscal health. With the subsidy bill already becoming a problem given the oil subsidy,
additional pressures from food subsidy will only worsen the situation. With growth slowing and
consequently revenues not matching up to expectations, additional expenditures will keep the
government away from the path of fiscal consolidation. We expect GFD/GDP in FY2012E and
FY2013E at 5.7% and 5.8%, respectively